What you need to know
Taiwan’s issue isn’t that consumer prices are growing too quickly. It’s that wages are growing too slowly.
Taiwan’s low wages have led to a sluggish economy. Here I’ll show why the theory of keeping wages low for business growth is detrimental to overall economic growth.
A rise in the minimum wage leads to a growth of wages across the board. In most high-income countries on par with Taiwan, the minimum wage has grown rapidly to catch up with the cost of living.
In Estonia, the minimum wage (pink line) has been growing at a faster rate than the other drivers of economic growth (household consumption expenditure and profits) and the economy. The high growth in wages allowed household consumption expenditure to grow faster, bringing along with it faster growth in profits and the economy overall.
As an advanced economy becomes wealthier, its minimum wage growth slows down since there is less pressure for their wages to grow rapidly to catch up with the cost of living.
In New Zealand, a moderately wealthy country, the minimum wage has been growing less rapidly than that in Estonia, and at a similar rate as other drivers of economic growth.
In the wealthiest advanced national economies, the minimum wage, adequate for the cost of living, does not need to be raised significantly. In these countries, it tends to grow more slowly than the other drivers of growth, as can be seen in the example of the Netherlands in the chart below. This pattern emerges in Benelux countries (Belgium, Luxembourg, the Netherlands), Australia, and Canada.
It is different in wealthier advanced countries, where the minimum wage is much more adequate for the cost of living. The government does not need to raise the minimum wage as significantly. The minimum wage only needs to increase incrementally every year to keep up with the annual growth in consumer prices, and to maintain purchasing power.
Falling into the former category of countries, Taiwan needs to rapidly increase its minimum wage to catch up with the cost of living. But after the 1997 economic crisis, the government froze the minimum wage for a decade, and the growth rates in the following years have never been ambitious enough.
Taiwan’s government believes that they help businesses grow by keeping the minimum wage (and therefore wages overall) low, but this “low-cost approach” has led to an economic slowdown. The potential of growth has never been fully realized.
But as wages grow, new customer demands emerge. Businesses are not going to tap into these demands until workers receive wages adequate to meet all the basic needs According to the charts above, from 1997 to 2019, Estonia’s business profits grew by about six times, while New Zealand’s business profits grew by about three times, and business profits in the Netherlands have risen by about twice as much.
Taiwan’s business profits grew by only about 2.5 times when they should have grown between three to six times – in between the rate of Estonia and New Zealand – over the same period, as can be seen in the chart below. As wages were kept low, household spending also stagnated. Household expenditure grew by five times and three times in Estonia and New Zealand, respectively, from 1997 to 2019, but it grew by only 1.9 times in Taiwan. Notably, these drivers of economic growth have been decoupling from one another since 1997, as can be seen in the chart below.
If the minimum wage had been growing at pre-1997 levels, Taiwan’s household consumption expenditure, profits, and GDP could be 20% to 25% today.
Taiwan’s chart should look more look like South Korea’s – an economy at the closest stage of development. But in South Korea, the minimum wage has grown faster than the other drivers of economic growth. Both household expenditure and profits have grown by 3.5 times, faster than Taiwan’s growth.
Advanced national economies can be categorized into three groups when we compare the minimum wage with producer and consumer prices.
In the wealthiest, like those of the Benelux countries, the minimum wage tends to grow in tandem with both consumer and producer prices (referring to the costs that businesses bear for the production of consumer goods and services). The growth of the minimum wage reflects changes in consumer prices over time, as explained above.
For example, Luxembourg has a wage indexation system in place to ensure minimum wage grows as fast as consumer prices. This system applies to all private and public sector workers to ensure everyone benefits equally.
In advanced countries at the second level of wealth like New Zealand, the minimum wage tends to grow faster, as do producer and consumer prices.
In the least wealthy advanced countries like Estonia and South Korea, the gap between minimum wage growth and the growth of producer and consumer prices has widened significantly.
Despite a high growth in minimum wage, consumer prices do not grow by similarly high levels in these countries. This allows purchasing power to grow, meaning consumers are better able to support small and medium-sized businesses.
Again, Taiwan is a less wealthy advanced country where the minimum wage is not yet adequate for a basic standard of living. The minimum wage should have been growing more rapidly. But as can be seen in the chart below, Taiwan’s minimum wage (pink line) has just started growing in the last few years, mainly under President Tsai Ing-wen. Taiwanese consumers lost purchasing power from the late-1990s to early-2010s because consumer prices grew faster than wages.
Given its stage of economic development, Taiwan’s minimum wage should be growing at higher levels than consumer and producer prices like South Korea, as can be seen in the chart below.
Three patterns emerge, again, when we compare only consumer and producer prices.
In the wealthiest advanced countries like the Netherlands where wage growth is slower, consumer prices do not grow much faster than producer prices. This is a similar situation among the Nordic and other Benelux countries.
In advanced countries at the second level of wealth like New Zealand where minimum wages have been increasing slightly faster, consumer prices tend to grow slightly faster than producer prices.
In the least wealthy advanced countries like South Korea where the minimum wages have been growing the most rapidly, their consumer prices tend to grow much faster than producer prices.
Given how its economy behaves in the previous two comparisons, one might expect that Taiwan’s consumer prices did not grow much faster than producer prices. But the chart below shows a widening gap between consumer and producer prices despite the stagnation of minimum wage since the mid-1990s.
As a less wealthy advanced country, Taiwan’s behavior is strange. The minimum wage has not been growing rapidly. The economy and profits have and fallen behind South Korea’s, and other emerging economies are catching up.
It is also unusual that consumer prices are growing so much faster than producer prices when the minimum wage is barely growing.
One reason for this is that producer prices have been kept low in Taiwan, which makes the gap between consumer and producer prices look wider. The other reason could be that because of stagnation of consumer demand stemming from low wages, businesses have been drastically increasing consumer prices to earn higher profits.
In Taiwan, wages are too low and consumer prices are too high in comparison. The government’s solution has been to suppress producer prices (as the chart above shows where Taiwan’s producer prices have largely remained the same since 1980), seemingly in the hope that businesses will willingly keep consumer prices low, but this is wishful thinking in capitalist society
The low-cost approach does not make any sense because it does not take into account the human and psychological factors behind how businesses think. It doesn’t take into account the inadequacy of Taiwan’s wages for its cost of living. Consumers are facing difficulties increasing their demand to support businesses, and businesses are distorting the economy even further by increasing consumer prices faster than they should. Taiwan will be stuck in this vicious cycle as long as wages stagnate.
A lesson Taiwan should learn from other advanced countries is: when wages have not reached a level adequate for the country’s basic standard of living, consumers are not earning enough to pay for all their basic needs. Increasing the minimum wage helps them meet more of their basic needs, and the increase in consumer demand will in turn benefit businesses, including small and medium-sized businesses.
Additionally, while we may have been told that inflation is a bad thing, by looking at the comparison above, we can see when looking over a longer term horizon, it is a normal circumstance for consumer prices to keep increasing – it is natural human behavior for businesses in a capitalist economy to want to keep increasing consumer prices to earn higher and higher profits.
As such, when the chairperson of the Chinese National Association of Industry and Commerce Lin Por-fong that minimum wage increases this year should be suspended in view of the pandemic, this is illogical. For one, increasing the minimum wage will wages across the board and ensure workers can afford the increasing consumer prices of basic necessities. For another, as shown in this article, putting more money in a sustainable and longer-term manner into the hands of consumers helps drives household consumption expenditure, which in turns grow profits and the economy – it is therefore good economics to increase wages. Increasing wages helps to increase consumer spending and grow the economic pie, which in turns helps businesses grow.
National Association of Small & Medium Enterprises head Lee Yu-chia also out that many small and medium-sized businesses which rely on local consumer demand have been hit by weaker private consumption during the recent Covid outbreak, but as this article explains, raising the minimum wage and wages as a whole is precisely the thing that will expand private consumption, so as to support businesses.
If we can understand that wages and consumer prices are both moving targets which interact with each other to help the economy grow, this will change the way we implement policies – we will realize we cannot grow one without growing the other.
The idea therefore isn’t to hold down wages to prevent consumer prices from growing; consumer prices are growing anyway and businesses are increasing consumer prices anyway. The issue isn’t that consumer prices are growing too quickly; rather, it is wages that are growing too slowly to catch up with the growth in consumer prices. Given this understanding, the idea for Taiwan at its current stage of development should be to ensure wages can grow faster than consumer price increases, in order to raise purchasing powers, and to boost the economy and profits.
While current export growth may boost GDP figures in the short term, this growth masks the inherent problems in Taiwan’s system if nothing is done to resolve the underlying economic distortion. To reverse Taiwan’s current stagnation and jump out of the current gridlock, the government therefore needs to start implementing policies like other advanced countries at a similar stage of economic development – by increasing minimum wage (and thereby wages as a whole) at a rate that can allow wages to attain the cost of living in the country, in order to grow the economy.
In the next article in this series, we will take a deeper look at the distortion in Taiwan’s consumer and producer prices.
READ NEXT: Roy Ngerng on the Minimum Wage
TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)
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